Microsoft's Robbie Bach on Realtime and the Cloud

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Earlier this summer I traveled to Redmond to talk realtime and the cloud with senior Microsoft executives. In this conversation with Robbie Bach, President of Microsoft’s Entertainment & Devices Division, I tried to delve into what “we inelegantly call Three Screens and A Cloud” from Bach’s vantage point atop Xbox, Zune, Windows Mobile, Media Server, and related hardware. The subtext: Microsoft’s nextgen realtime strategy at the cusp of consumer and enterprise.

STEVE GILLMOR: By hook or by crook, you own considerable — I wouldn’t call them clients as much as platforms —that intersect in a really interesting way around the real-time space.

ROBBIE BACH: Sure. Sure.

STEVE GILLMOR: I mean, for example, on the iPhone, the iPhone 3.0 software enables a bunch of real-time capabilities like Bluetooth in the back seat of a car, you know, things like that which may be no-brainers, but because of Apple’s —

ROBBIE BACH: They’re still harbingers of future things —

STEVE GILLMOR: Exactly. And the same way that Xbox 360 basically opened up the notion that — I mean, I have an eight-year-old daughter.

STEVE GILLMOR: She’s on the phone with her friend and they’re both on the same site and they’re interacting with each other.

ROBBIE BACH: Right.

STEVE GILLMOR: So she’s — didn’t take her long to figure out that while the technology is catching up, that she could basically just simulate this herself with a couple of —

ROBBIE BACH: Right. My daughter does the same thing. My daughter does the same thing.

STEVE GILLMOR: So that is an enormous platform, and my particular interest in the end is going to be how that synchs up with the enterprise space because what’s on person’s game is another person’s —

ROBBIE BACH: Enterprise technology.

STEVE GILLMOR: — social platform.

ROBBIE BACH: That’s right.

STEVE GILLMOR: Which is another person’s CRM.

ROBBIE BACH: And it works both ways, too. Sometimes stuff starts in the enterprise, sometimes it starts in consumer. But in either case, it migrates — things migrate with some regularity back and forth across that divide.

STEVE GILLMOR: So last positioning point is I think there’s a lack of understanding about what Microsoft’s goals are.

ROBBIE BACH: I think that’s true.

STEVE GILLMOR: You know, of what is — I mean, the overarching strategy, of course, we understand, but how do you manage this transition to an on-demand cloud environment?

ROBBIE BACH: Yeah.

STEVE GILLMOR: And where —

ROBBIE BACH: How does the business model work?

STEVE GILLMOR: And where does the rubber really meet the road?

ROBBIE BACH: Sure.

STEVE GILLMOR: And you seem to be astride a number of the areas where there’s significant ROI that’s coming.

ROBBIE BACH: Sure. Sure. Some of which are here. But the clearly — well, so let me just step back. First, let me just make sure we’re clear on what the Entertainment and Devices does, and then we’ll spend two minutes on strategy, and then we can dive deep.

So Entertainment and Devices on one hand is a portfolio of businesses in a way, because I have all of the company’s gaming assets in the division, our music and video assets are predominately here, not 100 percent, but pretty darn close.

STEVE GILLMOR: And by music you mean Zune?

ROBBIE BACH: You’ve got Zune. Yeah, music would be Zune, video would be Media Center and Media Room. You still have — Media Player is a platform technology of Windows, so they don’t license music, there’s not marketplace for it, those kinds of things. And then MSN does some video work, but again, not their primary focus.

We also are responsible for the mobile phone work that the company does, Windows Mobile and associated things. And then there’s a fourth business that people don’t actually have a lot of visibility to, but which is an important part of the division, which is our mice and keyboard business and our embedded software business. And ironically, actually, our Mac Office business, those are all in the division.

Final thing that’s in E&D is we’re responsible for all retail sales for the company. So the sales force in my division — if you buy something at Best Buy, doesn’t matter what it is, that’s Microsoft related, my sales force has brokered that relationship, managed that —

STEVE GILLMOR: Is there some store initiative?

ROBBIE BACH: There’s a store initiative as well, although I don’t manage that, and that’s a conscious choice. They would be one of my best customers. So my job is to make sure that I supply them with great Microsoft product and that Microsoft’s experience shines the best in their store, and of course that’s obviously their job as well. So that’s sort of what the division does.

Now, if you asked us sort of what’s the strategy, I could go through each of the businesses has a little bit of their own flavor on things in terms of what they’re doing for the specific segments that they’re in. But if you looked across all the businesses, we focus on this concept which we inelegantly so far call three screens and a cloud, which is not a magical phrase. But when I think about what’s happening in entertainment in particular, I think over time people are going to want to think a lot less about where their media is, they’re going to want to worry a lot less about how it’s backed up. They’re going to want to be able to access it from whatever device they want and whatever screen they want. And I actually think they’ll want unique experiences that are enabled because they’re on multiple screens and because that’s all connected through a cloud set of services.

Now, if you asked a consumer, “Do you want a cloud entertainment experience?” They would say, “No, that actually doesn’t sound very appealing.” So that part of it may not be articulated yet. But when you paint a scenario for people, they say, “Oh, yeah, I want that. And, in fact, they participate in what are effectively cheap man’s versions of cloud experiences today. American Idol is just a cheap man’s version of a cloud experience today. It’s a duct tape cloud, right? There actually really isn’t a cloud, but they use a cell phone network to vote on things and take that, add five years, put some technology around it, and I can tell you I can have a really exciting entertainment experience around that that’s way richer than American Idol and is way more interactive and uses cloud technology to help enable and power it.

STEVE GILLMOR: Is that what you’re doing?

ROBBIE BACH: Well, if you looked at the long-term vision of where we want to get to, sure. I mean, the long-term vision where we want to get to, you kind of have to go in stages. The first thing we want to do is we want to enable people to have access for multiple screens to the same set of services that they want. So take Zune as an example. We have Zune on the PC today and we have Zune on Zune devices. We just announced at E3 that Zune will be on Xbox.

And so the Zune video services will be available across all three of those screens. Ultimately, we had music on two of those, it’s just a priority question, we’ll move that to Xbox at some point not defined. But we’ll expand that across those screens. So that’s just an example of the types of things we want to enable.

On the reverse side, you take Xbox Live, which has been phenomenally successful on the TV screen, we do pretty well with it on Windows, although the business model is actually quite different, and so it’s just a question of time before somebody says, “Okay, so how do we think about the Xbox Live experience on a mobile phone or on a portable device?”

So the first phase of this is thinking through how our services play out to people in a three-screen world where the cloud is a provisioning area. Then you can go one step further and say, no, that’s actually just the first step. That sort of says take existing experiences and migrate them to a cloud environment. What if we did something different, which is we said, oh, we want to create an entertainment experience and we assume the cloud exists? Then assume the consumer has access to all three screens or two of the screens or a favorite screen, what would that experience look like?

And that, to me, you know, that may be five, six, seven years away, but it’s a very interesting possibility. And because what it does is it not only changes the technology delivery, which people may or may not care about, but in particular, it changes the actual form of the entertainment. It actually changes the experience for the person getting involved in the entertainment. That, to me, is very exciting.

Anyway, that’s the broad brush.

STEVE GILLMOR: That’s what you’re doing?

ROBBIE BACH: That’s the broad brush on the strategy. And we’re early in the process of understanding that, but Xbox Live has 20 million members. So it’s not like we don’t have good traction in a number of these places.

STEVE GILLMOR: So real time. Does it mean anything to you?

ROBBIE BACH: Real-time as a phrase, you know, part of me will say, well, so tell me what you think it means to you. I can look at it and say, “Do we think that there are real-time experiences that we’re going to enable through our cloud-based services?” And the answer is absolutely yes. You can argue today we have real-time — it’s mostly peer-to-peer, but real-time experiences today on Xbox Live.

To me, real-time means everything’s served from a server. And this is not peer-to-peer, in fact, in the most extreme case, you could say there is no client and we’re just going to have a server-led gaming experience.

Me, I think that’s actually quite a long ways away, personally. I could tell you about the physics of that, I actually think it’s quite hard, and I think the business economics of it are very, very difficult because it doesn’t actually scale very well.

STEVE GILLMOR: So what are you saying? That basically Google is not going to get there?

ROBBIE BACH: Well, I’m not going to make any posit about what Google’s doing. They’re actually not the guys who have proposed this. There are some other guys who have actually showed some of this at the game developer conference. They showed some concepts, Steve Pearlman and those guys have showed some stuff.

And there’s interesting technology. There are places where — and they may achieve some breakthroughs that make it happen earlier than I think. But when we look at it, we say, okay, all of these things are possible, let’s go through the stages of development of where we’re at and just recognize where we are today and where we might end up. And doing a server-based delivery just because you can, if it degrades the consumer experience, why would you do it?

You have this funny technology advancement going on in the space where people would say, well, gosh, things are moving to the cloud. And I say, verily, yes, some set of things absolutely are and should move to the cloud. But at the same time, I would tell you, client power is getting cheaper and cheaper and cheaper, and more and more available on more and more devices.

And so you have this very interesting dynamic where the phone has never been more powerful as client, right? And you can only see that increasing. You know, in a year’s time, you’ll be able to do Xbox 1.0 graphics on a phone. So you’d say, okay, now, why would I render that on the cloud?

And there might be reasons why you’d do it. But you’d also have to ask yourself, gosh, what’s the experience like and how do I produce the best experience?

STEVE GILLMOR: So what do you see as the advantages of the cloud in terms of what you’re working on?

ROBBIE BACH: Well, for us — for us, the cloud does a number of things. First of all, it enables us to create community. Right? I mean, the biggest thing — people ask why is Xbox Live successful. Why do we have 20 million members on Xbox Live? And a good percentage of those people who pay us real money for a subscription every year. And some of it is about multi-player gaming, I will grant you. But a significant portion of it is about those people saying, “Hey, this is where I meet my friends. This is where we do things together.”

And if you don’t have a cloud set of services behind that, that gets actually quite hard. How do we do the types of things we’re doing now where you and your friends will be able to watch a movie together and not be in the same room? That requires a set of cloud-based services behind it to enable that to happen in a rich and effective way. And, oh, by the way, talk and see each other at the same time. That’s a pretty interesting experience and a pretty interesting trick. And that all happens through the work that we’re able to do on Xbox Live.

So to me, the biggest thing that the cloud does in the immediate term is it gives us a social environment. It gives us the ability for people to do things together.

STEVE GILLMOR: All right. So that naturally brings us to this new real-time phenomenon that some people think started with Twitter, but others think that Twitter is just an example of something.

ROBBIE BACH: Sure.

STEVE GILLMOR: What’s your take on that stuff.

ROBBIE BACH: Well, I think it’s just part of the socialization experience. I mean, we announced at E3 that on Xbox Live we’re going to have a client for both Twitter and Facebook and MySpace-type integration. We think that’s actually a nice part of the environment.

I don’t really know what the business model — I don’t really understand the business model. I’m not an expert on it, so there may be a business model there, I haven’t seen it yet. So we’ll see how it plays out. But certain as their demand for people to have that kind of rich interaction and real-time communications experience, and the answer is yes.

Now, how long-lived that is, how pervasive it is, how wide does it go? You know, you’ve seen Facebook, My Space go pretty wide. I think Twitter and these — what I would call almost a blend between text messaging and blogging, right? You know, there’s certainly strong appeal to that now, we’ll see how that plays out over time.

For us, it’s just part of the trend I said about earlier, which is about socialization. And so we want to enable people who are Xbox Live customers to have that be part of their experience.

STEVE GILLMOR: So one of the things I talked to Ray about and also to Brian was the notion of this kind of real-time technology finding a home at the center of the desktop. Now, since you’re basically dealing with multiple platforms and providing shared experiences I guess is the way to put it, across these different — do you see that as —

ROBBIE BACH: What do you mean by “the center of the desktop”?

STEVE GILLMOR: Well, you know, right now what would you say is the center of Office?

ROBBIE BACH: Outlook.

STEVE GILLMOR: Outlook, right.

ROBBIE BACH: No question.

STEVE GILLMOR: Okay. So that’s e-mail —

ROBBIE BACH: Calendar, contacts.

STEVE GILLMOR: Right. And Messenger isn’t one of those.

ROBBIE BACH: That actually depends on — this is where Office Communicator is an important element. That will depend on who you are. So around here and around a lot of companies, Office Communicator is the way people talk in meetings. For better or for worse.

STEVE GILLMOR: So is there an intersection point between Communicator and what you’re doing?

ROBBIE BACH: I suppose there is, although little of what I do you would call productivity work. There’s a few exceptions in the division, but generally speaking, the things we do are sort of the flip side. We’re sort of the leisure and entertainment part of what we do.

Now, having said that, the principles of those things absolutely do carry across.

STEVE GILLMOR: Give me an example.

ROBBIE BACH: Well, take an example on Xbox Live. People do a ton — you’d be stunned and how much text chatting they do across the Xbox Live network. Actually, a lot. And I mean, it’s millions of messages. And how is that different than two people in a meeting of 14 sending an Office Communicator message to each other saying, “Gosh, I wish this meeting would end”? I mean, it’s just part of the social fabric that we’re creating.

I mean, many times what I think on both sides we’re doing, because work and play are both parts of the social fabric, on many parts what we’re doing is creating fabric in socialization, using technology to create new fabric for socialization. And Twitter is part of that, Communicator is part of that, text messaging is part of that, Facebook is part of that, e-mail is part of that, video conferencing is part of that.

You know, we sell a camera for your Xbox. You’d be amazed at the types of activity that generates on Xbox Live of people who want to see other people while they play their game. And we demonstrated this camera technology at E3. That’s another part of the social fabric. You’re now going to create a whole new set of ways for people to interact and experience things in a social setting.

STEVE GILLMOR: And once you have the camera, then you might start to use it in other contexts.

ROBBIE BACH: You very well might want to use it in other contexts. Now, the camera for us in the case of Project Natal the camera for us has a number of different aspects. First, there’s just the fact that you have visual input and you can actually see other people. So that’s interesting in and of itself. But it goes one step beyond that which is not only is the camera the way for communications to happen, but it’s the way for the interaction with the device to happen. So now it becomes the user interface, if you will.

STEVE GILLMOR: The mouse.

ROBBIE BACH: It becomes the mouse, the keyboard, in the case of gaming, the controller for whatever you want to do. Now, that’s a very interesting concept. And of course people’s immediate reaction after that was, first of all, from a gaming perspective, they went, “Wow.” So it just kind of, you see the demos, and the demos aren’t made up, they’re real. We actually had people go and say, “No, that wasn’t made up on stage, go do it.” And you had people go do it and they go, oh, well, I thought it was cool, but I thought it was gimmicky. Now I see it actually works and I just walked in and did it.

So the demo parts are all cool, but the second reaction people get it, so, what does this mean for the PC? And maybe not at E3, but after E3 we had people say, “What does this mean for the office?”

And you say, well, just think of the possibilities. And there are some interesting possibilities. But it’s nothing like what we would do on Xbox, I don’t think. Xbox is a 10-foot experience in front of the big screen where hand motion and activity make sense. I mean, if I’m sitting here standing at my desk six inches away from the screen doing this, it’s not clear that that’s going to be value added versus just using my hand on a mouse and making the screen drive.

So the scenarios, I think, will end up being different. You know, so what we’ll go do is we’ll go do some testing. We’ll go say, hey, let’s put some creative people on the experience side of this. The technology part we’ll keep making progress on, but let’s think about the user experience. What actually would somebody use that camera for? What would be the ways in which you can do interesting things beyond video conferencing, for which you don’t need a 3D camera. So we’ll go and explore that and we’ll see where that plays out.

STEVE GILLMOR: So when you started doing the sort of real-time interaction on Xbox, I mean, was that something that you discovered during the process of thinking about other things?

ROBBIE BACH: No.

STEVE GILLMOR: Or was that the goal from the beginning?

ROBBIE BACH: That was the goal from the beginning. It’s one of the things that I’m most proud of in the Xbox space is from the first concept meetings, we said this is going to be an online environment. And at first, that was a technological statement. So we had to figure out, okay, what technology do we have to have, and somebody’s got to do a bunch of networking, there’s some networking software, and we’ve got to think about whether — you’ll laugh at this, but we had to decide whether we had a modem or not. You know, 2000, 2001 was about the time when that transition was happening, and the fact that we took the modem out was hugely controversial. Sort of a funny historical fact.

STEVE GILLMOR: And the right thing to do.

ROBBIE BACH: And the right thing to do, and it was the right decision, as it turned out. But we were criticized for it. You go back and read the articles, people said, oh, no, not enough people have broadband, you’ve got to have a modem. Well, for the experience we wanted to have, having a modem wouldn’t have mattered. Right? You couldn’t have had a good enough experience anyway, so why bother? It wasn’t worth the cost.

From the beginning, we said Xbox Live has a set of things, principles, that we’re going to abide by. One of those was every game will be voice enabled. You don’t have an option. If you want your game to run on Xbox Live, you have to support voice. And we had a lot of people say, wow that’s crazy. It’s going to take up system resources. Yeah, well, if you want to have a real-time experience between you and I, we’d better at least be able to talk to each other, right? I mean, you can’t have a social gaming experience if you can’t talk to each other. And by the way, independent of the fact that people send a lot of text messages on Xbox Live, it’s darn hard to type with the controller. It’s not an ideal experience. So the fact that voice was there from the beginning kind of changed the way people thought about things.

So I think from the beginning, you know, sometimes we stumble into things. Sometimes things evolve in a fortuitous way and you find a way.

STEVE GILLMOR: Like what?

ROBBIE BACH: Well, I think they happen in a number of places. But even in things — if I go back historically to think about Word and Excel and some of the things we talked about there and some of the experience, would I have said that that would have led to SharePoint? No. We didn’t start with Office and say, oh, gosh, sometime this will be a server — at least I didn’t — maybe there was somebody else who did. When I was working on the group, we didn’t think of that as a logical evolution. But when we saw what was happening with networking and communications and people’s desire to have real time and intranets, we said, oh, wow, SharePoint, now SharePoint’s a big part of that business. So sometimes things evolve that way. Sometimes something like Xbox Live is more intentional.

STEVE GILLMOR: So mobile. How’s that going to start to resonate off of the other things you’re doing?

ROBBIE BACH: Well, if you think about it, mobile has kind of a multitude of roles for us here inside the company. First of all, phones are becoming a platform by themselves. So they’re another computing platform, we’re going to play, we think, an important role in that computing platform.

Secondly, they turn out to be an important screen, the role of which is only just becoming apparent to people and might be slightly different than then PC screen and the TV screen because of form factor and where you are and environment and those types of things. But there’s a bunch of things people are going to want to get on their phone. And so for us, it’s another distribution point, if you will, for services. So it’s sort of a business by itself, which is called selling into what’s going to be a big market for smart phones, and then there’s a second key component which is, hey, it’s central to what we’re doing in terms of our three screens and cloud strategy.

And our job is to make sure that our services integrate well and sing well across all three of those local experiences on the TV, predominately with Xbox today, on the PC with the PC and on a phone. And we have to make sure that we do a great job delivering that. And I think the secret for us is in the software and the service delivery. That’s where we’re going to do our best work.

STEVE GILLMOR: Well, Zune seems to be sort of an odd man out there.

ROBBIE BACH: Well, no, not really. I think the thing you realize with Zune is you have to think about Zune in a couple of different ways. You have to think of Zune as both a vertical, portable music experience. And if you look up Zune HD, it’s a great experience, it connects to our services, it’s a first-class citizen. I just think of it — it’s another portable screen, it just happens to be a very specialized portable screen because it really does music and video and it’s not a phone and we don’t have any plans for it to be a phone.

So that’s Zune in a vertical sense. But you’re also seeing us move the Zune experience horizontally. So we now see it on the PC, you see it on the Zune device, you see it on Xbox, you’ll see that experience elsewhere. And increasingly, we think of music and video as being experiences that show up on all the different screens. And you should think of Zune as our brand for delivering that music and video across all the different screens.

STEVE GILLMOR: So it’ll integrate with the phone.

ROBBIE BACH: Yeah, we don’t have anything to announce and haven’t announced anything.

STEVE GILLMOR: Sure.

ROBBIE BACH: We know there are other screens where Zune isn’t yet. So there’s more things we can do.

STEVE GILLMOR: So can you break down percentage of time on each of these things that you spend?

ROBBIE BACH: That I spend? I probably spend most of my time today working in the phone environment. And interestingly, a fair amount of my time on the PC environment. Both of those. But a little less on — actually, meaningfully less on Xbox than I used to because Don Mattrick now runs that business. And he actually has more experience in the gaming space than I do by a factor of two. And so independent of the fact that I ran that for six or seven years, he’s doing a great job. The Xbox business has probably been in the best shape it’s been in ever. And he continues to run that. So I spend a little less of my time on Xbox and a little bit more of my time on mobile and on the PC screen.

STEVE GILLMOR: So what are you doing on the mobile space?

ROBBIE BACH: Well, so there’s sort of short-term and medium-term things, and then obviously long-term. Long term, we already sort of talked about, and I’ll only talk about that philosophically anyway.

STEVE GILLMOR: Sure, I understand.

ROBBIE BACH: But in the short to medium term, you know, the next deliverable is Windows Mobile 6.5 and the rollout of our brand around Windows phones. So that’ll come this fall. And then obviously there’s future work beyond that to continue to advance the work we’re doing there. There’s a set of services we’ve announced a marketplace for Windows Mobile 6.5 and My Phone, which is a cloud-based service that enables you to both have your phone backed up as well as exchange and move data around between your phone and your PC in an easy and natural way.

STEVE GILLMOR: Does that use Mesh?

ROBBIE BACH: Yeah, it does. It does. So you’ll see us start to integrate all of those technologies. I mean, this is the place where we have real capability because it’s not just the Windows Mobile team that’s doing work, it’s the Mesh team that’s doing work, it’s the Silverlight team that’s doing work, it’s the Azure team that’s doing work.

And you mentioned earlier that you don’t think people really understand the full import of our strategy. I mean, some of that is because there’s a lot of parts to the strategy, and sometimes we don’t do a good job of stepping back and communicating the richness of everything that’s there. And sometimes it’s just the fact that we’re constantly enhancing it. It’s not like we ship a product that’s called “real time” and suddenly it all just shows up there.

STEVE GILLMOR: Sure.

ROBBIE BACH: Right? Azure comes at last year’s PDC and we announce Azure. Okay, so people get that. And then there’s My Phone gets announced at Mobile World Congress. A different event, certainly connected, you know, Mesh is at a different place, Silverlight is at Mix. So you have all these components that are sort of part of their own space, but which we are absolutely knitting together.

STEVE GILLMOR: Yeah. Talk about Silverlight. How does that intersect with what you’re —

ROBBIE BACH: Well, Silverlight, for us, has a number of different and interesting aspects to it. First of all, as a business model enabler in the advertising space, it’s certainly a way that people are using to produce ads in the online world, whether that’s on the PC or on a mobile phone or on Xbox or on any other type of device. So that’s one aspect to it.

It also turns out to be part of our development platform, just more generally. So beyond advertising, which you can think of as, quote unquote, a simple app. You can take that into much richer space with a richer set of applications, and you’ll see that spread across the product line and across the screens that we’re doing. So to me, Silverlight is one of those central components to what we have to do.

STEVE GILLMOR: So gaming space. How is that?

ROBBIE BACH: You should — you know, we haven’t announced anything and I think you’ll see us make progress in the gaming space. Today, the environment we typically use for gaming is XNA, which is a great technology and continues to go well and over time we’ll have to make sure we make it clear how that fits in with the Silverlight vision.

STEVE GILLMOR: So what I’m hearing here is you’ve sort of had so much success in the Xbox space that you basically sort of kicked yourself upstairs and that’s what I’m hearing.

ROBBIE BACH: Sure.

STEVE GILLMOR: And there’s obviously great opportunity and also some challenges in the mobile space.

ROBBIE BACH: Yeah, that’s fair. That’s fair.

STEVE GILLMOR: So tell me about the challenges.

ROBBIE BACH: Well, I think the challenges are fairly straightforward, there’s just a lot of competition. Tremendous opportunity for a lot of people.

STEVE GILLMOR: What’s your take on the Pre?

ROBBIE BACH: You know, I think it’s interesting. I think you have to ask yourself, okay, so where does it truly differentiate itself in a way in which it stands out from the other guys? And because of their market position, they’re going to truly have to stand out. And so we’ll see how that plays out. You know, they’ve made an interesting play around having touch and a keyboard. So we’ll see whether that plays out and whether that’s big enough of a differentiator.

I think the challenge they’re going to have is it’s what I would call a vertical experience that doesn’t have consistent depth in all of the verticals. We’ll see how their music and video story plays out as a consumer device because they’ve sort of decided they would be dependent on iTunes. We’ll see how long Apple allows them to do that. We’ll see how that plays out.

STEVE GILLMOR: A couple weeks maybe.

ROBBIE BACH: Yeah. That would have been my reaction. I’m not close enough to the situation to really understand it, but without that, they don’t really have a music and video play, which I think is tough in today’s phone market. I think it gets harder and harder to be credible in that space.

So I think it’s one of those interesting things where if the product had come out two years ago when Palm’s market position was a little bit different, you might have a different reaction than you do today. We’re just going to have to see how it plays out. Might play out well for them. It’s probably a good bet for them to place given where they are in the market. But I think it’s far from a sure thing just given how much competition there is.

STEVE GILLMOR: Android.

ROBBIE BACH: Android, in some ways, sort of in a similar place. I think they’ve got some interesting things going on. People are certainly going to experiment with it. That’s not a big surprise. And so you’ll see some phones this fall, you’ve already seen a couple, you’ll see a few more.

The question with Android is going to become is this a vertical play from Google or is it a horizontal play.

STEVE GILLMOR: How do you mean?

ROBBIE BACH: Well, as a vertical play, I mean, it’s a Google phone. I don’t mean they own the phone literally, but I mean it has a prescribed set of Google services on it, it’s a Google experience from end to end and they’re going to incubate that and care for it.

STEVE GILLMOR: Isn’t that what Windows Mobile is?

ROBBIE BACH: No, actually, today Windows Mobile is much more of a horizontal play. We don’t actually — when you look at a Windows Mobile phone through Verizon, as an example today, or AT&T, they have a lot of their own services on there. It’s not pre-subscribed. It’s not a lot of requirements, and actually we service a broad breadth of hardware.

Google has been sort of saying there’s going to be a Google experience and a broad breadth of hardware, so that’ll be interesting to see how that plays out. They’re also going to have to decide how deep they want to get on each of the experiences and how well they want to fine tune them. I would describe the early Android phones as having some nice characteristics, but not as deep as it’s going to need to be across all these different experiences, and they’re going to have to decide how to do that. And they’re going to have to decide how they make money at it.

Today, it’s a little unclear what the actual business model is. They don’t actually require you to use their search. And search, by the way, is pretty tough to monetize at least today. I think that’ll change over time, but it’s still tough to monetize today. So I think we’re going to have to see how that plays out. They’re certainly a worthy competitor.

STEVE GILLMOR: So you can touch on the iPhone if you like, but we’re back to Windows Mobile. So what are we going to see?

ROBBIE BACH: What we need to do in Windows Mobile and what we are doing with Windows Mobile is sort of a two-pronged thing. First, you have to see what I’ll call user experience innovation from us. And we’ll start a little bit of that with what we’re doing in 6.5. There are some very nice advancements in 6.5 along those lines. And then you’ll see more in the future on that front because certainly the user experience is critical on these devices. And because they’ve gotten so rich technically, you can do rich user experiences now.

And today, our user experience isn’t quite as rich as we’d like, and I think 6.5 will take that one step up and then you’ll see more from us in the future. And then the second aspect of it is really understanding what services we want to deliver on the phone and how those integrate into the user experience that I just talked about. And marketplace and My Phone are the first two examples of that, and you’ll see more work from us in that space.

STEVE GILLMOR: Okay.

ROBBIE BACH: And the important thing I’ll just point out about that to tie to the topic we started on is at some level, people will choose phones based on just the hardware design, that’s certainly true. Some level, they’ll choose it based on the core experience of the device and the phone itself. And ultimately, people are going to start choosing phones based on the services they get access to and what that service experience is like.

STEVE GILLMOR: Right. Which is the social kind of —

ROBBIE BACH: It’s the social experience I talked about. It’s the, oh, I can get this on my TV screen, on my PC screen, and on my phone screen. It’s a, if you will, next level of functionality and capability that people are going to come to expect. And they don’t expect that today and I think as you go out 12 months to 18 months, 24 months, you know, three or four years, that’s going to start to become part of the expectation. And now the requirements and capabilities you need as a supplier of technology in that space change.

And, you know, I would say that Microsoft’s capabilities there, that development, helps us and puts us in a much better position to compete.

STEVE GILLMOR: So you’ve got large scale right now in terms of Windows Mobile?

ROBBIE BACH: Yes.

STEVE GILLMOR: And significant deficiencies in terms of experience.

ROBBIE BACH: Yeah. We need — this past year was almost 20 million phones. So we feel good about that scale.

STEVE GILLMOR: Sure.

ROBBIE BACH: And there are some parts of the experience that we think are awesome. We think as a business user, our mail experience with Outlook and Exchange, we think that’s world-class and that continues to be world-class.

If you looked at us as a consumer device, that’s probably the place where we need to make the most progress and the place we’re investing the most energy.

STEVE GILLMOR: You know, the browser experience is —

ROBBIE BACH: Agreed. And that — 6.5 has a huge improvement in the browser experience. I’ll stand by the 6.5 experience on browser in a very nice way. I think that’ll actually be a big step up.

STEVE GILLMOR: How do you see the interaction with Azure?

ROBBIE BACH: On the mobile side, or just overall?

STEVE GILLMOR: Overall, but —

ROBBIE BACH: Well, I think if you look across what we want to do with Azure, Azure creates whole new scenarios of things people can do. And it enables things to be processed in the cloud or in a cooperative way between the cloud and the client that we wouldn’t have been able to assume before. That does create some really interesting new scenarios.

Now, you’ve got to decide — in all these things, you have to decide which things you want to be processed in the cloud and which things you want to be processed locally and divide that up in a logical way. And that will actually be the art of creating a great end-to-end experience.

STEVE GILLMOR: Well, I mean, to you point, one of the things that I thought was most interesting about the Google Wave demo, I don’t know if you saw that or not, was this — I always forget the word for it, but it wasn’t a spell check as much as it was actually using a bot to go in and scrape the text and send it to the server and perform, you know, a look-up in terms of context as opposed to — so that —

ROBBIE BACH: Almost like grammar checking.

STEVE GILLMOR: Yeah, that’s the word.

ROBBIE BACH: Right.

STEVE GILLMOR: Okay. It wasn’t almost, it was grammar checking. And what’s interesting is that I can remember for maybe ten years the statement that that was not going to happen off the server, it wasn’t going to be a function of the cloud. And I’m not saying that this put the lie to that, but I think in general —

ROBBIE BACH: Why was it better because of the cloud?

STEVE GILLMOR: I guess — I don’t think it was better. I think that it was identical.

ROBBIE BACH: So this is — I think this is the interesting debate on this balance between client and cloud. And like when we talk about what we do, we’ll always tell you we think there’s going to be rich client work, because we believe that. And at the same time, we believe the cloud is incredibly important. So what I would say in response to that is neat technically, so it proves some things that you can do it technically, but ask yourself the question: I should want to use that vehicle and take up the bandwidth for that vehicle and the battery life off the phone for that vehicles for things where I can only do it with the cloud or I can do it uniquely better with the cloud or there’s some customer benefit to doing it with the cloud.

And for the things that I can do locally just as well that I can do faster locally without taking up the bandwidth and without sucking battery life, I should do those locally. And to me, the secret of all these experiences is the balance between those things. And people come to real time or cloud computing or however you want to think about this with a, oh, everything is going to go to the cloud. I just think that’s wrong. I really do. I think there will be many things that go to the cloud, there will be many things that stay locally, and the secret will be the balance between those things and thinking through each scenario and each technological advancement will be key to making that successful.

STEVE GILLMOR: You know, put another way, latency is in the eye of the beholder. You know, if you don’t feel latency, then it’s an acceptable experience.

ROBBIE BACH: Well, I’m dialing the bar slightly higher. I want the experience to be better than acceptable because if it’s acceptable and more expensive, I want to do it locally, right? And there is cost to using the cloud. Right? There’s cost to the operator, there’s cost to the cloud operator as well.

STEVE GILLMOR: Sure.

ROBBIE BACH: Right. So you only want to do that in a case in which you’re demonstrating value and the customer — somehow there’s going to be compensation for the use of the resource.

I think there’s some perception that people just say, well, there’s going to be these big server farms, so it’s all free.

STEVE GILLMOR: Well, maybe to them.

ROBBIE BACH: Well, that’s sort of my point. That’s sort of my point. And so when I think about this, I think about cloud computing and real-time computing as being this awesome additional tool in the tool case that I didn’t have before. And now what I want to do in experience, I don’t have to say, okay, what can I squeeze onto the phone? I can say, okay, what’s the best optimal use of resources between the phone and the service in the cloud and come up with the right answer. Grammar checking may not be the right answer, right? Maybe it is, I don’t know. Maybe there’s some reason why that’s particularly efficient or better.

But I can certainly think of other scenarios where you might say, hey, there are some things we actually do want to process in the cloud. Maybe there are things we want to do in the background, there are things where we want to store and forward, there’s logic we want in the cloud so that it knows what to do with things when I’m doing a certain thing on my phone.

I always pick the silliest, easiest one, which is not technologically complicated, but still not done right as far as I know anyplace, which is what happens with photos I take on my phone, right? Today, most of those photos never see the light of day off of the device. Part of that is a function of the quality of the photos. But even if you have a phone that takes good photos, most people don’t know how to get it off the phone and if they do, they don’t know how to get it anyplace else. Right?

Now, why wouldn’t a cloud-based service know that you took a picture, take it, know where you want to put it on the PC, know who you want to distribute that picture to? It’s not complicated, it’s not rocket science, it’s not particularly creative.

STEVE GILLMOR: It’s Mesh basically.

ROBBIE BACH: Correct. And the ability to do that — that, to me, is one where I say, okay, now I know why — the cloud I know is uniquely capable of helping me in that case. And today you can say, well, the poor man’s version of the cloud should be automatic wi-fi detection when you’re near your PC, and it should transfer photos that are on your phone to the PC. Nobody’s even done that very effective as far as I know. That’s the poor man’s version of the disintermediated cloud.

So I just look at it and say, wow, there’s lots of scenarios that we haven’t explored yet. And some of them will be valuable and value-added and we should drive hard on those, and some of those will be nice and neat and, yeah, it’s cool that you can do that. But that may not be the best thing for the experience. We just have to decide which one is which. That’s the magic of this and the technology is cool and that’s magical in its own way. But the guys who are going to succeed, as we’ve demonstrated with Xbox Live, as you’d say Apple demonstrated with iPod, is the guy who gets the experience right. I mean, that’s where the magic comes.

So interesting topic, it’s a cool area.

STEVE GILLMOR: Yeah. It appears to be sort of Popular Mechanics, but I think it’s a lot deeper than that.

ROBBIE BACH: Oh, it’s way deeper than that. It’s way deeper than that. The problem is — what I would say to you is I think there’s an element of it that is still sort of pop fiction or tech science and that’s all fine. We always have that, and it’s good because it sort of pushes the art form forward.

STEVE GILLMOR: Sure.

ROBBIE BACH: And then there’s a part of it that says, okay, that’s really cool, I’m glad you can do that, now tell me why that’s important. Let’s go and discuss the things that people are going to want to pay more for. Most of what Xbox Live does isn’t new technologically. We did it better, one could argue, but multi-player gaming wasn’t new. It’s been on the PC for actually a fair amount of time.

But the Xbox Live team figured out the right things to do and the right things to focus on and put it in a way in which the consumer said, oh, now I get why this is relevant to me because it’s not a nerdy, hey, I found somebody else on that network, I was able to figure out some way to connect to them and we can play a game if everything’s lined up properly, which is sort of the science part of it.

Instead, it was, I go online and Xbox immediately tells me that my seven friends are online, it tells me what game they’re playing, and tells me when I have appointments with them. Oh, well, that’s not science fiction. That’s actually useful.

STEVE GILLMOR: Play dates.

ROBBIE BACH: Yeah. And that’s the part that when I —

STEVE GILLMOR: And if you have kids, you understand how important those are.

ROBBIE BACH: Yeah, exactly. And when I look at our talent, I think we have a lot of deep technical talent, so that’s actually great. But at some level for what I do, because most of it’s consumer-facing, a lot of the talent expertise is about experienced talent and bringing that to the technology.

Something like Xbox Live started as raw technology and then some people did some experience work around it, and now you see what we literally, inelegantly I would argue, call the new Xbox experience is actually a really nice social experience with Avatars and places you go meet friends. And who would have thunk?

I will tell you, when I played my first Xbox Live game, I would not have imagined we’d be where we are today, that’s for sure. That’s for sure.

STEVE GILLMOR: Well, there have been some other things like Second Life that made it easy to improve.

ROBBIE BACH: Well, and Second Life to me is the perfect example. You have to — very cool, very interesting in its own way, interesting technologically, but is it big?

STEVE GILLMOR: No.

ROBBIE BACH: No. No. It’s not. And it’s not big because ultimately the experience doesn’t get you to a place where, A, a lot of people want to do it, and it doesn’t take you to someplace that you just go say the third time you’ve done it, oh, it’s still wicked cool and there’s still more things I want to do. I mean, it’s not much different — with no disrespect — it’s not much different than Dungeons and Dragons done in a little bit of a different way. And there are people who love that, so there’s a committed audience to it, but it’s not a broad phenomenon. And that’s the difference between something like that and MySpace or Facebook or Twitter where they manage to get beyond the science part and into the broad experience.